Taxes, Regime Uncertainty, and What's Next

The Wall Street Journal reported June 19, 2010 that Japan was considering a ten percent cut in its corporate tax rate. That will leave the United States as the highest taxing developed nation. And, taxes will increase again January 1 when the Bush tax cuts are allowed to expire. So here we have the highest taxes at the same time the Administration is stealing money from BP and threatening any company that thinks about doing business in the U.S. Why would anyone invest in the U.S.? We are looking at a real disaster -- a stumbling economy, a huge stimulus that does not stimulate but instead increases debt to unheard of levels, increased taxes, and rising unfunded liabilities. The unfunded liabitilies are now estimated to exceed $130 trillion. How do we get out of this? Either a huge inflation must occur, a long term recession/depression must occur, or a huge reduction in benefits to entitlements must occur, or some combination of all of these has to occur. The only other option is for the U.S. to declare bankruptcy, sell off assets, and start all over again.

The WSJ also provided an excerpt from a forthcoming book called "Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis" by Anatole Kaletsky, editor of the Times of London. Kaletsky argues that economists failed to either predict the crisis or provide solutions to it. He notes that "The issue at the heart of all the explanations of boom bust cycles is the unpreditability of the future.....In nonfinancial businesses market prices may move more or less rationally in response to measurable changes in supply and demand, but in financial markets, prices respond mainly to subjective expectations about events in a distant future that is often unknowable, even in a probabilistic sense. ....The role of inherent unpredictabiity in finance means that the most important prices set in financial markets -- interest rates, exchange rates, stock market values and property values -- will almost never correctly reflect conditions in the economy of today and may not create the right investment and saving incentives to keep the economy in equilibrium. ...every so often, financial markets go haywire, succumbing to the alternative excess of greed and fear that create boom bust cycles. ...There are times...when a political force from outside the market economy must intervene to moderate the financial cycle. GOVERNMENTS OR REGULATORS (caps mine) must have the power and the self confidence to second guess and override market signals." (Saturday/Sunday June 119/20, W3, WSJ)



This is one of the scariest and most depressing things I have read in quite some time. There are so many incorrect statements and concepts in this excerpt that there is not room to list them. But, to argue first that booms and busts are the result of excessive expectatons and then that market prices do not reflect the information in the economy is just ludicrous. Where do market prices come from but the interactions of buyers and sellers thus including all information and expectations such buyers and sellers bring to the interaction. The cause of booms and busts is always government intervention and monetary mismanagment. If left to their own devices, markets would solve such imbalances tyhat might arise; some people, like Keynesians might think that it takes too long for the market to do this, but it seems clear to me that evidence from the 1921 recession, the 1930-45 Great Depression, and the 2008-current, recession show that government intervention prolongs rather than shortens downturns.

I gather that the "new" model that Kaletsky is calling for is the Chinese model -- government control with some free markets. I suggest he read Mises, Hayek, and Rothbard and try to learn how markets work. Before people start clamoring to follow the Chinese model, they should learn what government intervention has ment to the creation of wealth. China looks good now because it started from such a low level. We shall see if the markets and the government collide in the near future.